July 5, 2020

SB-Accounting

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Definition of Gains and key Explanations

Definition of Gains and key Explanations

In the last lesson, we learned the meaning of assets, and a detailed explanation was added. In this lesson, the focus is on Gains. Many people have confused the meaning of gains and revenue. These two accounting terms are income but they are different in terms of their usage.

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What are the gains?

Gains are part of income which do not arise from a business day to day activities.

Gains are income other than revenue.

Also, Gains are the increase in the value of an entity’s assets.

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Key Explanations

International Financial Reporting Standard (IFRS) Foundation doesn’t give a formal definition of gains. However, from the above-coined definitions, the term “Gains” is explained below.

Gains are income. Just as revenues are incomes, so are gains. However, gains do not arise from normal business activities.

If the normal business activity of a firm is the sale of furniture, the sale of such furniture is not Gain. But, if the business doesn’t sell furniture, the sale of its furniture at a price higher than the amount stated in its books of accounts is again and not revenue.

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Gains also arise from the sale of buildings and Investments. A firm may have bought a building for 5 million Naira. In five years’ time, the value of the building may have appreciated 35 million Naira. Further, if the firm decides to sell the building at the current price, that is 35 million Naira, it earned 30 million Naira Gains.

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For investments, especially investments in shares. Gains arise when the price a company’s shares bought increases. For example, from the Nigerian Stock Market Data, Dangote Cement share price was 137.30 Naira per share on the 27 of May. However, on the 28th and 2nd June the price soar to 138.50 and 141.00 Naira per share. If a firm or an individual brought the shares of Dangote Cement on the 27th and decided to sell it on the 2nd of May, such an entity would have earned 3.70 Naira per share (i.e 141.00 – 137.80). This is a Gain on fair value.

Definition of Gains and key Explanations

Gains can also arise from inventory. A firm can earn an unrealized profit on its inventory if it decides to know what it has gained from manufacturing its own inventories instead of buying it from the market.

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Gains also arise from the translation of foreign currency. This is mostly applied to businesses that have branch offices outside the country of the head office.

Gains may also arise in other forms. The important point here is that such income is not from the normal business activity of an entity.

Gains are recorded in the statement of profit or loss as part of non operating profit. It is recorded in between operating profit and profit before tax.

Gains are mostly stated in the statement of other comprehensive income. The financial statement below revealed the positions you can notice Gains reported in a statement of other comprehensive income. The report is a screenshot of the Dangote Cement annual report.

From the above screenshot, investment income and gains/(loss) on investment on equity shares are examples of “Gains.”

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In the next article, the term “loss in accounting” will be explained.

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